Thursday, July 30, 2009

Health Care: Etiology of a Medical Crisis

According to many people, we are in the midst of a health care crisis. As evidence, people cite the large number of uninsured -- up to 43 million according to some estimates -- and the underlying problem of skyrocketing costs. Only higher education has increased at a rate comparable to health care in the past 30 years. But why has this happened? And does it constitute a crisis?

Health care vs. health insurance
Insurance exists to cover catastrophic costs that the insured would not otherwise be able to afford. If your house burns down, you are suddenly without anywhere to live and, in all probability, you still owe the mortgage on your house. If you die, you leave your family with burial expenses and the problem of making ends meet without your income. Home insurance and life insurance cover these two eventualities by paying a large sum in the event of tragedy, while collecting smaller amounts from a number of people who will never suffer the loss (but who cannot know this in advance).

Health insurance is quite different in that it covers not only extraordinary, expensive medical costs, but also routine costs -- going to the doctor for a sore throat, a flu shot, even a regular checkup. There is no way that you are going to save much money by having someone else pay bills that you know you are going to have to pay. At best, you can realize some savings by being part of a collective with greater purchasing power. However, this comes at an extraodinary cost: it sets up a perverse set of incentives that pull you and the insurance company in opposite directions. For the insurance company, the incentive is to restrict coverage as much as possible. They make money by charging more than they pay out, so it is natural that they will want to limit the occasions on which they have to pay. They have responded by creating special lists of doctors that you must see, tightly controlled lists of procedures that they will cover, and onerous requirements such as forcing you to see a primary care physician to get approval before visiting any specialist. You, on the other hand, have virtually no reason not to seek medical assistance on every occasion. You pay only a small fraction of the actual cost of either the care or the medicine that you receive, so naturally you are going to use this service far more than you would under other circumstances. Usually, the insurance companies have the upper hand, but they can be forced to expand coverage, for example through the law that requires mental health coverage.

The other medical insurance
The perverse set of financial incentives in health care is exacerbated by another problem: malpractice insurance. Large medical malpractice judgements may or may not be common, but they have certainly driven up the costs of malpractice insurance, especially for doctors in certain fields such as obstetrics. They may pay $100,000 or more per year; and although I don't know how much they make, I would have to think that this is a significant fraction of their salaries. Doctors have responded by practicing "defensive medicine," i.e. ordering tests for every conceivable problem. Some of the possibilities may be rare in the extreme, but the doctor is at least protected from lawsuits. The unfortunate part is that the patient has little incentive to reject these tests, because he pays little or nothing for them. In fact, the patient is rarely even consulted; the doctor simply orders the tests to protect himself.

The illusion of preventive care
Some politicians, including President Obama, seem to believe that we can cut health care costs drastically by ordering even more preventive tests and thereby catching problems before they occur. While these tests are certainly cost efficient *for thost patients with the condition*, they are not always cost efficient over the whole population. Only a small fraction of people, perhaps 0.1%, are going to have a given condition, and the money saved on treating those people must be weighed against the costs of testing many healthy people. Besides, 80% of an individual's health care costs are incurred in the last two years of his life, when his body is overtaken by a number of weaknesses at once. Screening people can only save on the other 20% of health care costs, if that.

End game
And here's the thing: there is virtually an infinite amount of money to be spent prolonging a person's life. There is always more research that can be done to discover new cures and new treatments. As long as the money is there, companies will invest. The newest treatments may only have a tiny chance of being successful, but, if you are not limited by financial considerations, who would not want to get them and possibly extend their lives?

At my wife's graduation many years ago, then-First Lady Hillary Clinton gave the commencement address. She cited the story of a young girl with some devastating illness who had used up her insurance's maximum lifetime payout of $2 million, and still was not well. Her mother called every other insurance company she could trying to get coverage. In rejecting her, one representative explained, "We don't insure burning houses."

For Clinton, this was the ultimate insult: sick children are not burning houses. While the comment was insensitive, however, it gets to the root of the health care problem. There is an infinite amount of money to be spent trying to prolong people's lives, but only a finite amount of money available. Somehow, we have to make decisions about when to cut off the supply. Ironically, if Clinton had her way and universal coverage were instituted, the girl would almost certainly have received less care than she already had. The government cannot afford to spend $2 million on every person. In every country with government health care, even basic operations, such as hip replacement surgeries, are rationed, so that people have to wait a long time to get them. More exotic, cutting-edge treatments would have very little place in such a system.

The image of insuring a burning house also nicely captures the confusion that exists in the public mind between health care and health insurance. Of course a company is not going to offer to sell a terminally ill patient health care -- that is the road to bankruptcy, at which point it would no longer be insuring anyone. Nor would a government provide indefinite health care for the terminally ill. Eventually, they would be left to die as best they can, as most of us are at one point or another (those who don't die suddenly, that is). But because people associate health insurance with health care, and therefore with basic things like broken arms and colds, the idea of being without health insurance seems heartless.

The way out
Democrats frequently complain that our health care system is a market failure. Spiraling costs are indeed a failure, but not of the market. The present system of employer-provided health care was not a market phenomenon, but was started in WWII as a way of providing coverage to more people. The AMA successfully fought national health coverage and accepted the current system as preferable, although not perfect. But tax breaks for employers are the root of our current problem. Because it is so much cheaper for employers to provide health insurance than for you to do it yourself, you'd be crazy not to take advantage of the insurance provided by your company. The problem is that you then have no choice. Oh, you may have the choice of an HMO or PPO plan, but your choices are very limited, and they always come from a single provider -- you have no option to shop for better coverage from a different insurer. Your employer makes decisions about choosing an insurer based on things that are best for him: cost, of course, and creating an attractive package that will attract employees, and offending the fewest possible employees. But the person actually using the service gets no choice. Tying health insurance to the employer has also created the problem of "pre-existing conditions," because you have to chance health insurance every time you change jobs. If it were not for the special tax break for employer-provided health care, you could buy insurance yourself and keep it as long as you wanted.

The solution is simple: end tax breaks for employer-provided health care. This is probably impractical, so the next-best thing is to provide the same tax breaks for individuals who buy their own insurance. You could choose from any of a number of insurers, and you could shop for a plan that suited your needs. To cut costs, you could choose to buy actual insurance rather than a health plan disguised as insurance. You could have a deductible so large that you would have to pay for routine doctor's visits, but not for major surgery or in-patient care. This is the sort of option I have on my automobile insurance. If my car gets in a minor accident, I can afford to pay $500 or $800 to have it repaired. If it gets totalled, however, I don't have the money for a new vehicle, especially if my current one is not paid off. I keep my premiums low with a $1000 deductible, so that I have to pay for all the minor accidents. This gives me an incentive to drive carefully and to decide if a minor scrape really needs fixing or whether I can live with it. I can rest easy, however, knowing that I will be covered if the car is wrecked beyond the point of usability. Individuals with health insurance could make the same choices. It might seem prohibitively expensive to visit the doctor without insurance coverage, but consider that you and your employer are probably paying $1000 or more a month for you and your family. If you were able to cut that down significantly, you could easily afford a few doctor's visits now and then and still come out ahead. As an added advantage, you wouldn't have to resent the fact that you are subsidizing hypochondriacs who go to the doctor every time they sneeze and pay only a $10 co-pay. You would have more incentive to take good care of yourself through diet, exercise, and home medication.

What about routine checkups? Well, what about them? Somebody has to pay for them -- you don't honestly think that you get them for free now, do you? If there are people truly too destitute to afford routine checkups, I would certainly be in favour of providing them government subsidies so they could get care. I would even support government subsidies to support basic medical care -- which we already have, incidentally, in the form of Medicaid. What I don't support is the government taking over the health care system so that everyone gets shoe-horned into the same health care package. It is not only bad for the economy; it is not only bad for medical care; it is also, and above all, bad for freedom. Everywhere the government has taken over health care, it has trended toward outlawing private practice, forcing everyone into the same system. And once you are dependent on the government, the government will be making key decisions about who gets what kind of care and, ultimately, who lives and dies.

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